Incorrect Beneficiary Designations Can Undermine Estate Planning

The most carefully thought-out estate plans can go badly awry if one simple detail isn’t carefully attended to – designating beneficiaries for everything from trusts and wills to insurance policies and bank accounts.

It’s easy to overlook these important details, but as circumstances change, outdated beneficiary designations can completely derail your intentions. This is a matter that can require fairly frequent attention. Ideally – and your financial advisor can help with this – you’ll review all these on a consistent schedule.

In estate planning, we’ll often do a lot of work crafting a plan to make sure our clients’ assets – the accumulation of a lifetime’s worth of wealth – are disposed of exactly as they wish. Yet, it’s entirely too common for the client to go and mess up the whole thing by inadvertently changing – or neglecting to change – a beneficiary designation. This can easily defeat the estate plan’s whole purpose!

All that time, effort, money, etc. can go down the drain due to one simple oversight.

Just the other day I was talking with a client who has changed her will several times for various reasons. But through it all, she has been entirely consistent about one thing: she is crystal clear about what she wants her family to get or, in one case, to not get.

However, recently she has made some changes to bank accounts because she believes she is starting to experience dementia. That realization is a positive thing; sadly, too many people in the same situation are in denial and refuse to seek help. Fortunately, this client recognized she does need assistance managing her money. When I heard this, I asked her if she had added a certain family member’s name to her bank account. She said not yet, but she was planning to do so.

That set off alarm bells. I told her that, if she did put this relative’s name on her bank account, all the money in that account would pass directly to that person at her death. I thought she was going to keel over right then and there! She has six figures in that account and absolutely does not want that money going to that particular relative.

She was under the very common misconception that putting someone else’s name on an account would just give them access needed to help pay bills and balance the checkbook. What she didn’t realize was that this change would remove that account from her estate. So, instead of being distributed in accordance with her will, that money would just become the property of the relative whose name was on the account.

Whether it’s a bank account, an investment account or an insurance policy, people all too often designate beneficiaries at the beginning and then forget all about it. An all-too-common example, unfortunately, is a divorced person who has neglected to remove the ex-spouse as a beneficiary.
Even if you don’t think a change is needed, it’s a very good idea to double-check these designations every so often, just to be sure everything is up to date.

I had a client who needed to change the designation on a life insurance policy. She found that it listed an incorrect address and social security number for the previous beneficiary. Like so many people, she had not contacted the insurance company since she first bought the policy, so no one realized the information was incorrect.

Any important life event – birth, marriage, divorce, etc. – should trigger a review of all beneficiary designations. The objective is simple: to ensure that they are still what the owner intends. This is crucial for a very important legal reason – no matter what intent is written into a will or trust, it will be superseded by whatever beneficiary designations are on file.

The best-laid plans of mice and men! If the designations are out of synch with the will or trust, all that planning will be for naught.

Some types of assets or accounts will get special treatment if the spouse is named beneficiary. Those include such retirement accounts as IRAs and 401(k) plans. So, assuming the marriage is harmonious and there’s no other reason not to do so, it’s a good idea to name the spouse as beneficiary.

If in doubt about whether beneficiary designations are in sync or at odds with the rest of your estate plan, you should review everything with your estate planner or investment advisor. It would be a shame for all your planning to end in a stalemate.

One other very important consideration is naming contingent beneficiaries. Just in case the person or persons you name don’t survive you, specifying who would be next in line eliminates any guesswork or uncertainty. Yes, we all think we’re invincible, and we can predict who will go in what order. And yet I have seen 80-year-old clients who have outlived heirs in their 30s. It can and does happen. Consider the rare but real possibility, for example, that both estate owner and beneficiary might die together in a car wreck or plane crash.

A somewhat related matter is that if any of your beneficiaries are minors, you should be sure to specify who will be handling the money for them.

My bottom line: any well-designed investment portfolio or estate plan requires periodic checkups. It’s always a good idea to review your beneficiary designations as part of that process.

Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends. The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics. Readers should be aware that the facts may vary depending upon individual circumstances. The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.

Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.